DEPRECIATION

DEPRECIATION
A reduction in the value of an asset over time

METHODS OF DEPRECIATION
o STRAIGHT-LINE METHOD
o SINKING FUND METHOD
.
o WORKING HOURS METHOD
o .SUM OF THE YEAR’S METHOD

o DECLINING BALANCE METHOD

o DOUBLE DECLINING BALANCE METHOD

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STRAIGHT LINE METHOD
This is the most widely used and simplest method for the calculation of depreciation. It reports equal depreciation expense each year
throughout the entire useful life until the entire asset is depreciated to its salvage value. It assumes that the value of an asset decrease at
a constant rate, assumes the loss in value is directly proportional to the age of the property

𝑭𝑪 − 𝑺𝑽
𝐝=
𝒏

𝑫𝒎 = 𝒅 𝒎
Where:
𝐹𝐶 = 𝐹𝑖𝑟𝑠𝑡 𝐶𝑜𝑠𝑡
SV = 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
BVm = 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑚 𝑦𝑒𝑎𝑟𝑠
𝑩𝑽𝒎 = 𝑭𝑪 − 𝑫𝒎 Dm = total depreciation charge
after m years
d= 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
n=economic life
END OF THE YEAR DEPRECIATION BOOK VALUE AT THE
CHARGE END OF THE YEAR
0 FC
1 d FC-d
2 d FC-2d
3 d FC-3d

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 PROBLEM 1:

ABC Corporation purchases a piece of machinery for $50,000. The estimated salvage value is $5,000, and
the useful life is estimated to be 10 years. Calculate the annual depreciation expense using the straight-
line method.

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 PROBLEM 2:
At the beginning of 2015, Nestle Corp purchased new equipment for $500000. The equipment was shipped
from two states over for $2000 with an additional $800 for insurance. Nestle Corp hired an employee that can
operate the equipment. This specialized worker must have a $100 license to operate and will be renewed each
year. Installation of the equipment amounted to $15350. The equipment has a useful life of 8 years with
$20200 salvage value.
a. What is the depreciation expense?
b. What is the depreciation at the end of 2018?
c. What is the book value at the end of 2018?

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PROBLEM 3:
A unit of welding machine cost P45000 with an estimated life of 5 years. Its salvage
value is P2500. Find its depreciation rate by straight line-method

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SINKING FUND METHOD
A technique for depreciating an asset while generating enough money to replace it at
the end of its useful life. As depreciation charges are incurred to reflect the asset's
falling value, a matching amount of cash is invested. These funds sit in a sinking
fund account and generate interest

𝑭𝑪 − 𝑺𝑽 𝒊
𝒅=
𝟏+𝒊 𝒏−𝟏

𝒎
𝒅 𝟏+𝒊 −𝟏 Where:
𝑫𝒎 =
𝒊 𝐹𝐶 = 𝐹𝑖𝑟𝑠𝑡 𝐶𝑜𝑠𝑡
SV = 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
BVm = 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑚 𝑦𝑒𝑎𝑟𝑠
Dm = total depreciation charge
after m years
𝑩𝑽𝒎 = 𝑭𝑪 − 𝑫𝒎 d= 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
n=economic life
i= interest rate

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PROBLEM 1:
An equipment costs P10000 with a salvage value of P500 at the end of 10 years. Calculate the annual
depreciation cost by sinking fund method 4% interest.

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PROBLEM 2:
A machine cost P100000 and the salvage value is P20000 after 5 years at 10% interest rate.
a. Constant depreciation per year
b. Total depreciation charge after 3 years
c. Book value of the machine after 4 years
d. Depreciation after 2 years

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PROBLEM 2:
A machine cost P100000 and the salvage value is P20000 after 5 years at 10% interest rate.
a. Constant depreciation per year YEAR BOOK VALUE Depreciation Total
b. Total depreciation charge after 3 years
(dn) depreciation
c. Book value of the machine after 4 years
d. Depreciation after 2 years (Dm)

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WORKING HOURS METHOD
A method of calculating the depreciation of the value of an asset over time. Depreciation expense for a
given year is calculated by dividing the original cost of the equipment less its salvage value, by the
expected number of units the asset should produce given its useful life. Then, multiply that quotient
by the number of units (m) used during the current year

𝑭𝑪 − 𝑺𝑽
𝑫𝒎 = 𝒙𝒎
𝒏
𝑚= number of units/hours used during
that year
𝑩𝑽𝒎 = 𝑭𝑪 − 𝑫𝒎
n = estimate production capacity

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PROBLEM 1:

A machine costing P3000000 has a salvage value of 0.1m at the end of its useful life of 20 years. It can be
used for 5000 hrs. in its entire life. Find the accumulated depreciation after using it for 1000 hrs.

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PROBLEM 2:
An equipment costs P480000 and has a salvage value of 10% of its cost at the end of its economic life of
36000 operating hours in a period of 5 years. In the first year of service, it was used for 12000 hours. If
at the end of 2nd year, it was used for 15000 hours, find the depreciation at the end of 2nd year.

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